Adani - Weak 2Q As SEZ, Power & Agri Pull-back; Coal In-line : BofA ML

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Adani Enterprises Ltd.
Weak 2Q As SEZ, Power & Agri
Pull-back; Coal In-line
􀂄 2Q Cons. Rec. PAT +222%YoY; Raise PO to Rs745 on New MDO
ADE 2QFY11 Cons. Rec. PAT Rs4.3bn, +222%YoY, led by robust coal volumes,
margin and the start of high-margin IPP business. However, it was -21% below our est.
on loss in Agri trading, delay in booking SEZ revenues and IPP. We raise our PO to
Rs745 (Rs685) as we add the recently won Chendipada MDO contract to SOTP despite
cut in Agri SOTP by 6%. Buy ADE on EPS CAGR of 45% over FY11-13E. Potential
catalysts: 1) 14x scale-up in its IPP to 9.2GW by FY14E, 2) 2.7x revenues at MPSEZ on
doubling of port traffic & pick-up in SEZ sales and 3) execute new mining contracts &
multifold rise in coal mining output to 110mtpa by FY20E, makes ADE one of the few
large coal plays in India.
2Q: Mundra port & coal deliver but SEZ, Power, Agri falter
ADE's transformation in its business model to annuities with high-margin/RoE (25.3%/
26% by FY12E) is visible in 2Q with EBITDA +149%YoY on margin +713bps aided by
1) the start of high margin IPP business, 2) consolidation of port business and 3)
robust 2Q coal margins @Rs399/tn, +7%, driven by volumes at 6.8mn T +38%YoY.
However, losses in Agri trading (Rs211mn v/s profit of Rs180mn), delay in booking
SEZ revenues at MPSEZ and delay of Ph 2 of Mundra power led Rec. PAT 21%
below BofAMLe. We cut FY11E EPS by 1.6% to factor in weak 2Q.
Power, port, and coal – the three cornerstones
It is scaling IPP capacity 14x by FY14E via an unregulated model (no cap on ROE). It
has pre-sold 77% of power at an attractive tariff and secured fuel/funding resulting in
visibility of 3x EPS over FY11-13E. Indonesian coal mines, which started operations in
FY09, should produce 11mtpa by FY14E while Indian mines will start in FY12E
(110mtpa by FY20E). IPP a/c for 20% of revenue and 52% of EBITDA by FY12E.
Rs745 PO implies scale-up across verticals; execution key
Our PO of Rs745 comprises 35% from coal businesses, 28% from Port & SEZ and
25% from IPP. As ADE enters new areas to create scale, risk is execution as funding
risk has reduced post-QIP. However, we take comfort in its track record (6x revenues
over FY03-09), timely start of Mundra Port and power plants, pre-sales of power,
leadership in coal trade and promoters’ entrepreneurial acumen.